The move in Google (NASDAQ: GOOGL) shares has been violent, up over 20% for the last two weeks. That’s a heck of a move for a $450 billion market cap company.
Many investors are kicking themselves for missing the move, including Apple (NASDAQ: AAPL) shareholders. But the one thing that Apple still has over Google is a dividend, which currently yields 1.7%.
Toward the end of 2014, I discussed the somewhat novel idea that the tech space is the best place to find dividend stocks. Apple didn’t make that list, but one name that did was the Warren Buffett favorite, International Business Machines (NYSE: IBM). IBM also happens to offer one of the highest dividend yields in the industry at 3.2%. It has paid a dividend for 53 years.
But there may soon be a more exciting dividend play for investors. That’s right, we could be on the verge of getting yet another dividend payer.
Google brought in former Morgan Stanley (NYSE: MS) Chief Financial Officer Ruth Porat as its new CFO in March. Since bringing in Porat, shares of Google are up 19%, which has outstripped shares of Apple and the Technology Select Sector SPDR ETF (NYSEArca: XLK) by more than 15 percentage points.
But Apple still has the leg up over the longer term. Shares of Apple are up 236% over the last five years, versus Google’s 169% return.
The question to ask is: Will the next five years be Google’s reign as top tech stock? It’s certainly on its way.
Google’s second-quarter earnings results, released July 16, were solid. Revenue is still growing and margins are on the rise. Google is putting in place a cost-monitoring system to help further boost margins. The company appears to be more disciplined than ever with an ex-Wall Streeter as CFO.
Google has downplayed the idea of returning cash to shareholders via a dividend or buyback, but for a company with nearly $70 billion in cash and still growing, it has to find something to do with all that money.
Porat appears to be more receptive to returning cash than past Google executives. She’s noted that it’s all about prioritizing how to allocate cash after first ensuring a reserve for working capital and M&A, and then potentially looking at capital returns. She noted on the quarterly conference call, “The profitability of our business gives us many opportunities.”
Now, I wouldn’t expect Google to come out overly aggressive and try to top the likes of Microsoft (NASDAQ: MSFT) or IBM in terms of dividend yield, but a modest 1.5% to 2% yield isn’t asking too much.
The company has $65 billion in cash and has generated $14.5 billion in free cash over the last 12 months. A 2% dividend yield would cost Google just $9 billion a year and leave plenty of money for its robust research and development spending. It could continue developing driverless cars and other innovative products, make acquisitions and still reward shareholders with a dividend.
Google is one of the few tech companies still growing healthily. It has grown revenues by 20% a year over the last three years, compared to Microsoft’s 8% annualized growth over the same period. It’s that type of growth – and additional runway for growth –that justifies Google’s premium valuation to older tech companies.
Investing in a stock that’s had a recent 20% run isn’t usually prudent, but for long-term investors, Google is proving to be a great company – one of several you can safely hold for decades.
Its focus on cost-cutting will only further shore up its balance sheet with more cash, which may soon find its way into shareholder pockets via a Google dividend or share buyback program.
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